With the announcement that a deal has been struck between the Pensions Regulator and Hoover to transfer its pension scheme into the Pension Protection Fund, we need to look into how this happened and what the outcome will be for its 7,500 or so members.
What’s going on?
The Pensions Regulator doesn’t make deals like this light-heartedly, so we know the situation is critical and has no perfect outcome. The Hoover 1987 Pension Scheme currently has a deficit of over £300m. Hoover Limited, the Scheme’s sponsoring employer has said they are struggling and can no longer support the Scheme and if they cannot detach themselves from it, they fear they’ll become insolvent and the remaining 500 or so workers in the UK will lose their jobs. This was compounded further when Italian company the Candy Group, which purchased Hoover Limited in 1995, declined to provide further support, which it had no legal obligation to do.
The Pensions Regulator has stepped in and agreed to a regulated apportionment arrangement with Hoover Limited who will pay £60m and give the Scheme a 33% share in the business in return for the Pension Protection Fund taking on the Scheme’s liabilities.
So, what does this mean for the 5,000 plus pensioners and 2,000 members who have yet to retire from the Scheme? For those above the Scheme’s normal retirement age, they will be protected, but will see their annual increases reduced. For those below the Scheme’s normal retirement age, they will receive an immediate 10% reduction to their Scheme benefits in addition to the reduced annual increases.
Is this fair?
Many would argue no, but it appears that whatever scenario you look at with these types of cases, Scheme members would get Pension Protection Fund compensation whatever the outcome.
How did this happen?
The underlying factors as to why some employers can no longer support their defined benefit pension schemes have not happened overnight. It can be argued that when financial conditions were healthier, employers did not contribute enough money into these schemes and since the credit crunch in 2007/08 we have remained in a low interest rate environment which isn’t good for pension schemes. The fact that people are living longer and therefore pension schemes are more costly to run than first anticipated is also a reason, along with the increase in guarantees the government has added on to pension benefits over the last 20 years or so.
Whatever, the reasons, we are seeing situations like this happen more frequently. As was the case with BHS and British Steel Pension Schemes (Tata Steel), the reduction in the members’ pension benefits appears to be subsidising the continuation of the employer.
Unfortunately we expect to see more of these types of cases in the near future, which is obviously not good news for defined benefit scheme members. However, when you put in perspective that there are around 6,000 defined benefit schemes in the UK, many of which are backed by strong employers, the actual numbers will be relatively small.
Stuart Price, Partner and Actuary at Quantum Advisory
Household name, Hoover, was once renowned for manufacturing home appliances in Merthyr Tydfil and Scotland, but, following its takeover by Italian Candy Group in 1995, production was relocated to China and the factory in Wales closed in 2009. There are still 500 Hoover employees based in the UK.
Established in 2000, Quantum Advisory provides pension and employee benefits services to employers, scheme trustees and members from offices in Cardiff, Bristol, Amersham, Birmingham and London.